Understanding Business Tax Debt

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Jill Bridges
Jill Bridges
April 02, 2019

When you run a business, you probably have a lot on your mind every single day. In addition to making sure that your company is successful, you want to be certain that your employees and customers are happy and you’re meeting all legal requirements for your business, including correctly filing your taxes.

Filing taxes can be difficult for even the most experienced business owner, and unless you’re a large corporation with a dedicated tax department, it’s likely that you’ll be handling your business taxes on your own. Fortunately, managing your business taxes isn’t as difficult as you might imagine, especially if you keep a few important facts in mind.

Learn how to file business taxes correctly so that you can keep your business in good standing with the IRS and void potential penalties and interests.

Understanding Business Tax Debt

Basics Steps for Filing Business Taxes

The forms that you will need for filing your business taxes will completely depend on the structure of your business. That being said, there are some basic tips that every business can follow to file their taxes successfully.

The first and most important step in filing your business taxes is making sure that your records are in order. Take the time to gather all your business records, including your expenses and earnings. Hopefully, you’ll have already made the transition to electronic record keeping. Gathering your business records is much easier when they are located in a spreadsheet or accounting program.

Once you have your records gathered, whether they are in paper or electronic format, you need to locate the correct tax form for your business. There are different tax forms for different business entities and choosing the wrong form can result in an incorrect tax filing (more on this issue later).

Next, you’ll need to fill out your tax form. Depending on the form that you are using, this can be very simple or very complicated. If you use the Schedule C form, for example, you’ll only need to fill out two pages and know your business expenses and total earnings. On the other hand, Form 1120 can be much more complicated, as it requires extensive information, some of which may not even apply to your business.

Finally, you need to be certain that you care to keep track of filing deadlines. As with tax forms, different businesses types have different filing dates. If you miss the correct filing date for your business, you may need to pay fees or interest on your taxes. C corporations, for instance, must file by the 15th day of the fourth month. S corporations have a filing date that’s a month earlier.

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Keeping these four factors in mind will help you file your business taxes correctly and on time, both of which are of the utmost importance.

What Forms Do I Need?

The most important part of knowing how to file business taxes is knowing which form you should use. As mentioned, this will depend entirely on how your business is structured. Sole proprietorships have much different filing requirements than limited liability companies (LLC), so you need to be sure you’re following the correct rules for your business.

Sole proprietorships, for example, will need to file three separate forms on a regular basis. In addition to filing your Form 1040, which is your personal return, you also need to file Schedule C and Schedule SE. Schedule C is used to report your business’s profits and losses and Schedule SE is meant for the self-employment tax. Many sole proprietors are also required to pay estimated quarterly taxes. These taxes are meant to cover the taxes that would be withheld from a normal paycheck.

If your business is a partnership or a limited liability company, you will need to file Form 1065 when paying your business taxes. Each partner in a partnership must be given a copy of the Schedule K-1, which is included with Form 1065. Schedule K-1 is used to inform the partners of their share of the business’s credits, deductions, and income.

If you are filing taxes for a standard C corporation, you will file Form 1120. This form should be filed by March 15 for taxpayers who are filing based on the calendar year. If you’re filing based on a fiscal year, you need to file this form by the 15th day of the third month after your tax year has ended.

Lastly, for S corporation taxes, you would file Form 1120S. The due date for this form is the same as for traditional corporations. Shareholders of an S corporation must also receive a Schedule K-1 form.

What Can You Deduct?

One of the things to keep in mind when filing your business taxes is that you may have access to a variety of deductions that can help you lower your tax burden. IRS rules allow businesses to deduct operating costs so long as those costs are necessary and ordinary, meaning they are common for other businesses in your field and necessary for your business to run successfully.

One of the most common business deductions you may be able to take advantage of is the deduction for purchasing business equipment. Instead of depreciating the cost of a piece of business equipment over multiple years, you may be able to deduct the full expense in a single year.

You may also be able to deduct certain business expenses:

  • Advertising.
  • Employee wages and benefits.
  • Business insurance.
  • Legal services.
  • Office supplies and utilities.

Cars that are used for the purposes of your business can also be deducted in many cases. You can deduct for auto expenses in two different ways. First, you can deduct your actual business expenses. Second, you could the standard mileage rate method. If you choose to use this deduction method, you need to keep track of your business miles. While this method is easier, the actual cost method often results in a larger deduction.

Sometimes, you can even deduct entertainment and meal expenses. To take advantage of these deductions, you must be certain that the expenses would result in you gaining business. Also, the entertainment should either take place before or after a discussion related to your business. In addition, you will only be able to deduct 50% of these expenses.

Finally, if you must frequently travel for your business, you may be able to deduct your travel expenses. These expenses can include transportation, hotel rooms, and even meals. If you wish to deduct travel expenses, you must keep meticulous records. You should document when you left on your trip and when you returned, how long the trip lasted, the location to which you traveled, and the business reason for your trip.

Common Business Tax Mistakes

Because taxes are so complicated, it can be very easy to make a mistake related to your business taxes. If you want to guarantee that you’re filing your taxes correctly, it’s a good idea to learn about a few of the most common business tax mistakes and how they can be avoided.

One of the most common mistakes people make related to their business taxes is assuming they can handle their taxes themselves. If you’re a small business owner, then it’s likely you don’t have the knowledge necessary to file your taxes perfectly, and using a tax preparation software is no guarantee that your taxes will be filed correctly. The best idea to file your taxes is to hire a tax professional for assistance.

Many business owners also assume that they don’t need to keep a tax diary and that simply keeping their receipts will be enough. A tax diary is much more than a record of expenses, as it includes common IRS questions that will help you properly keep track of your expenses. With a tax organizer or diary, it will be much easier for you to avoid an audit.

Another surprising tax mistake that many people make is believing that a big refund is a good thing. With a business, a large refund means that you’ve been withholding too much money and have been giving the IRS money interest-free. If you notice that your refund is very large, adjust your withholding for the next tax year. Your goal is to receive as small a refund as possible.

Speaking of withholding, you should make sure that you’re never using the money you’ve withheld to cover your business expenses. While this can seem tempting if your business is low on cash, it may result in big penalties when it comes time to file your taxes.

You may also be making mistakes when it comes to how you hire your employees and pay yourself. Because employees can be expensive, you may assume that using independent contractors is a better idea. While this seems like it makes sense, it can actually put you in a sticky tax situation if the IRS decides one of your contractors was actually an employee under the legal definition.

Similarly, you need to be sure that you’re paying yourself a reasonable amount. If the IRS determines your compensation as unreasonable, you may be taxed at the corporate level instead of the individual level.

You also need to be sure that you’re protecting yourself as fully as possible. If you’ve had a relationship with your bookkeeper for many years, you might assume that they wouldn’t steal from you. Unfortunately, this isn’t always the case. While letting a bookkeeper help you with your finances is a good idea, you should also make sure you’re regularly checking your records so that you can be certain that everything is above board.

If you want to avoid these common mistakes and others, such as missing deductions, it’s a good idea to consult with a tax professional. A tax expert can help you make sure you aren’t falling into any tax pitfalls that might result in penalties or an audit.

How Business Tax Debt Occurs

No one wants to be in debt to the IRS, but unfortunately, it’s very common for small businesses to be in tax debt at the end of the year. Being in debt to the IRS can be a very stressful situation, which is why it’s so important to make sure you are responding to your debt in the correct manner.

The first and most important part of dealing with tax debt is to never ignore notices sent by the IRS. Keeping in touch with the agency will help make sure you’re still allowed to do business while working on your debt. The IRS has the ability to collect the money it’s owed however it sees fit and may be able to seize your wages, bank account, and even your home to cover your tax debt.

If you still owe money after filing your taxes, the likely reason is that you either didn’t pay the correct amount or you filed late and are subject to a penalty. Businesses that file their taxes after the deadline may need to pay an extra 5 percent each month that filing is delayed, with a maximum additional rate of 25 percent. Also, you can be charged a $135 penalty and an interest rate of 3 percent if you haven’t filed within 60 days of the deadline.

Fortunately, there are several ways that you can deal with your tax debt. If you’re approaching the filing deadline and your taxes simply aren’t ready, you can request an extension so that you can avoid the penalties and interest that are the most common causes of tax debt. Once the debt has occurred, you can ask the IRS for an installment plan. With this plan, you can pay off your back taxes incrementally instead of trying to come up with the money to pay it all at once. Finally, you can work with a tax relief company to hopefully lower your tax debt.

What Happens When You Don’t File Your Business Taxes?

As you might imagine, there can be very severe consequences if you don’t file your taxes correctly. For instance, you may end up not paying the proper amount, which means you would be subject to tax penalties and may find yourself in tax debt.

The problem with back taxes is that the amount that you owe can substantially increase if you do not pay the IRS in a timely manner. Your tax debt will be subject to both penalties and interest, and the longer you wait to handle this problem, the more onerous your debt will become.

If you file your taxes incorrectly and find yourself in debt to the IRS, it’s important that you pay these back taxes as soon as possible so that you can keep your business up and running.

Even if you’re very careful, it’s possible to make mistakes on your business taxes, and these mistakes can easily result in tax debt. If you’re struggling with business tax debt and need help, considering working with an experienced tax attorney from one of the tax relief companies we’ve listed and reviewed.

 

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